Japan - May 2020

S P OT L I G H TSavills Research

J-REIT Volatility andJapan Property

Retail sales in Beijing were up 4.4% year-on-year to RMB539.8 billion in 1H 2018

J-REIT Volatility and Japan Property

Volatility in J-REIT unit prices
may be a sign of things to comeSummary• Having had a fairly strong start
to 2020, the COVID-19 outbreakhas significantly weighed on
global capital markets, and theJ-REIT market was no exception.
•O ver the course of a month, theTSE REIT Index experienced
a decline of close to 50%as anxiety spread amongst
investors. Though prices havesomewhat stabilised since, many
J-REITs remain at a discount toNAV.
•J -REITs, normally active
deal makers, have seen theiracquisition capacity weakened
following the sudden dropin their value. As a result,opportunities have opened up
for those with dry power at theready.
• Consolidation within the J-REIT
market may become morecommon, with smaller-scale
entities becoming prime targets.
• Defensive sectors such as
Residential and Logistics, as wellas Office - all with somewhat
solid fundamentals - haveunsurprisingly fared better
than the likes of Hospitality andRetail, and this can be seen in
the respective J-REIT indices.
• Within each sector, the flight tosafety has been apparent, withhigher quality J-REITs coming
out as winners.

INTRODUCTION
As COVID-19 continues to spread across theworld without an end in sight, global capital
markets have unsurprisingly been hit hard
and the J-REIT market has suffered more thanmost. Yet, under the current circumstances, it
is easy to forget that J-REITs had performed
solidly up until 20 February – when the TSE
REIT Index peaked at over 2,250 (Dividend:3.5%, NAV: 1.28). Things swiftly changed
thereafter, however, as the index lostaround half of its value over the course of
the following month, plummeting to 1,145(Dividend: 6.8%, NAV: 0.69) by 19 March. A
modest recovery to 1,640 (Dividend: 4.8%,NAV: 0.97) by 25 March notwithstanding,the index has hovered around the 1,500
mark (Dividend: 5.2%, NAV: 0.90) since thestart of April – around 30% below its preCOVID-19 high. J-REIT acquisition capacity
has consequently been weakened. As such,given that they have accounted for over 30%
of recent market transactions, this shouldpave the way for other investors previously
struggling to acquire assets.
All things considered, therefore, J-REITs
are likely to become rather active sellersof assets. Indeed, given the unprecedented
levels of uncertainty, and with global interest
rates moving even lower, defensive assets
with stable incomes should remain popular
for the time being. At the same time, deep
discounts to NAV may facilitate consolidation
within the J-REIT market. Cases of hostile
takeovers – previously a rarity in Japan – havebeen on the up recently as attitudes within

the market shift. For instance, real estate firm
Unizo received multiple offers from major
private equity players after travel agency HIS
initially announced its hostile takeover bid.
Meanwhile, Star Asia and Sakura REIT are
currently in the process of merging after theformer’s proposed hostile bid was successful.
This trend is likely to accelerate thanks tothe ongoing price adjustments, especiallyfor smaller, less financially endowed players
whose unit prices are expected to remainsupressed amid the uncertainty. To be sure,these smaller J-REITs with low NAV multiples
face the prospect of being left behind without
the ability to raise equity to fuel growth. As acountermeasure, therefore, they could start
to seek out white knights before a hostile bid
letter is delivered. Hence, the current scenario
may provide larger sponsors or buyers withhistorically high levels of dry powder theopportunity to act.
As of mid-April, over half of listed
J-REITs have NAV multiples of 0.8 or lower– suggesting that the majority of them areunable to raise equity capital for additional
property acquisitions, and may instead becomeacquisition targets themselves. During therecent bull run, there were many J-REITs
that were listed with a small initial AUM andwithout the property pipeline for furthergrowth. These smaller entities may experiencethe most upheaval going forward.
The violent price swings we have witnessedthus far can be partly explained by thecomposition of the investor base. Specifically,
it is made up of mainly domestic financial

GRAPH 1: NAV Multiple By Asset Class To Mid-April 2020
J-REIT Total

OfficeResidential

RetailLogistics/Infrastructure

1.60
1.40

• Looser monetary policy in theUS, a boon to the J-REIT market
under normal circumstances,
has instead dragged given thecurrent challenges. There may
be further turbulence ahead as
it would seem that a significant
outbreak in Japan is yet to be
priced into markets.

1.20
1.00
0.80
0.60
0.40

Source Savills Research and Consultancy

savills.co.jp/research

2J-REIT Volatility and Japan Property

institutions, particularly regional banks, whohave historically held J-REITs due to theirfavourable accounting treatment. Therefore,
with the end of the fiscal year approachingin March, many of these regional banks wereforced to sell off these holdings in order tostem their annual losses. Given that regionalbanks tend to take cues from one another,those who had not sold by the fiscal year
end may still feel pressure to offload J-REIT
investments as soon as any sign of market
uncertainty returns. Regional banks are also
major investors in private REITs. As such,
we may see these banks rush for an exit amid
fears of further market turmoil. That said,
this development may in fact be positive
for long-term investors, presenting muchawaited opportunities to buy at a discount.

Capital markets around the world were
hit hard by the COVID-19 outbreak,and the J-REIT markets have been noexception. This has, however, givenrise to discounted opportunities,
especially in the hospitality and retailsectors, and those with ample dry
powder may be able to capitalise.
Even so, further pain could lie aheadin the J-REIT markets.

TABLE 1: List of J-REITs at a NAV Discount and with a Market Cap of Less Than
JPY100 Billion, as of 15 April 2020
REIT NAME

PRICE/NAV

Ichigo Hotel REIT

0.40

Ooedo Onsen REIT

0.53

MORI TRUST Hotel

0.60

Fukuoka REIT

0.61

XYMAX REIT

0.61

Kenedix Retail

0.64

Global One

0.65

Hoshino Resorts

0.65

Hankyu Hanshin REIT

0.67

SAKURA SOGO REIT

0.67

Star Asia

0.69

Marimo Regional Revitalization

0.70

HEIWA

0.71

Tosei REIT

0.73

Takara Leben REIT

0.78

SANKEI REAL ESTATE

0.79

ONE REIT

0.79

MIRAI Corporation0.80

ESCON JAPAN REIT

0.80
Source JAPAN-REIT.com, Savills Research and Consultancy

TABLE 2: Dividend Yield Spreads of Each Sector Against The TSE REIT Index
YIELD SPREAD

OFFICERESIDENTIALRETAILLOGISTICS

HOTEL

Peak (Feb)

-0.5%

-0.2%

0.7%

0.0%

1.5%

Nadir (Mar)

-1.0%

-1.2%

2.6%

-1.1%

5.5%

Now (Apr)

-0.6%

-0.9%

2.6%

-0.9%

5.1%

Source Savills Research and Consultancy
Note: Feb, Mar, and Apr indicate 20 February, 19 March, and 1 April, respectively.

3FLIGHT TO QUALITY
During times of uncertainty, the flight tosafety is a well-trodden path, and this time
is no exception. During the aforementioned
decline of J-REIT prices from peak to troughbetween 20 February and 19 March, defensive
sectors saw their premiums widen, whilst
the hardest hit sectors, namely hospitality
and retail, witnessed their discounts deepen.
This trend can be seen in the table (Table 2),
showing the dividend yield spreads of each
respective sector against the TSE REIT index
over time. The residential, logistics and officesectors are the clear winners of this flight toquality, whereas the hotel and retail sectors
have significantly lagged. Recent property
performance disclosures, which reflect theinitial impacts of COVID-19, endorse thissector view.
To be sure, J-REITs are listed investment
vehicles, and hence, in contrast to hard
assets, exposure to instant trading activity
can lead to an immediate and often
exaggerated adjustment in prices – notto mention other non-property specificfactors such as the sponsor’s credit. Further,dividend yields (levered) are not equivalentto NOI yields. Given the absence of an actualbenchmark that closely mimics the movementof hard asset prices, mainly due to thesuspension of almost all transaction activity,
Table 2 may shed some light on the scale of
COVID-19’s impact to these asset types.
For further reading on the impact of
COVID-19 on Japan property, please readour spotlight report “COVID-19 and Japan
Property”.
SECTOR VIEW
When looking closer within each sector, astark difference in the required dividend
yield by investor emerges, demonstrating
the winners and losers among each asset
type (Table 3).

J-REIT Volatility and Japan Property

historically reversed when markets areunder stress. For instance, the gap between
these two was 120 basis points (bps) at therecent peak in February but widened byalmost 300bps at the nadir. Thereafter, thespread has stabilised at around 300bps.
Unsurprisingly, Grade A offices, typically

Office
The table compares Nippon Building Fund(NBF), a holder of Grade A Tokyo officeassets, and Ichigo Office REIT (Ichigo), an
investor of Grade B/C offices. The spread
between these two tends to be tight during
upbeat periods, though this trend has

TABLE 3: Dividend Yield by Sector of Select J-REITYIELD SPREAD

PEAK (FEB)

NADIR (MAR)NOW (APR)

Office: Grade A vs Lower GradeNBF

2.4%

3.9%

3.1%

Ichigo

3.6%

8.0%

6.3%

Premium

-1.2%

-4.1%

-3.2%

NAF

2.7%

4.5%

3.6%

Samty

4.9%

7.8%

6.5%

Premium

-2.1%

-3.3%

-2.8%

Residential: Tokyo vs Nationwide

Retail: High street vs Shopping Centres
JRF

3.8%

9.4%

8.2%

Frontier

4.8%

8.9%

7.6%

Premium

-1.0%

0.6%

0.6%

4.1%

3.1%

Logistics: Grade A vs Lower GradeMLP

2.7%

CRE

4.2%

7.2%

4.9%

Premium

-1.5%

-3.0%

-1.9%

Hoshino

5.0%

10.1%

8.2%

Invincible

6.5%

17.7%

15.1%

Premium

-1.5%

-7.6%

-6.9%

Hotel: Unique vs Budget

Source Savills Research and Consultancy

GRAPH 2: Year-to-date Performance of High Quality J-REITs in the Three Most
Defensive Sectors* vs TSE REIT Index as of 15 April 2020
120

TSE J-REIT Index

NBF

NAF

MLP

INDEX (6 JAN = 100)

110
100
9080
7060
5040

Source JPX, Savills Research and Consultancy*The three most defensive sectors, in no particular order, are Office, Residential and Logistics

savills.co.jp/research

4with cash-rich creditable tenants, shouldbe able to weather this crisis with relative
ease, whilst lower grade offices may not be as
fortunate.
Residential
Here we compare Nippon Accommodation
Fund (NAF), representing a middle-market
residential portfolio tilted towards Tokyo,and Samty Residential REIT (Samty), which
has a greater exposure to nationwide assets.
This time, the spread was 210 bps at theindex peak but widened by over 100bps on
the bottom day, stabilising at 280bps since.
Residential assets in Tokyo are renowned
for their defensive nature, though it would
appear that quality mid-market residential
assets across the nation are also exhibiting
stability, as long as the overall quality issound.
RetailThe spread between Japan Retail Fund(JRF), made up of high street retailassets, and Frontier REIT (Frontier), an
investor of shopping centres, including
supermarkets, stood at 100 bps on 20February. Interestingly, come 19 March,
Frontier’s discount had swung to a premium
following a 150bps adjustment, stabilisingat around a 60bps premium since. Indeed,high street retail has emerged from thecurrent uncertainty as a clear loser, whilst
supermarkets are one of a few winners. This
reversal in fortunes during the drawdown
may give food for thought for the prospectsof the rapidly changing retail sector. Now,
market participants have to contend withnot only the rise of e-commerce, but also
how the COVID-19 outbreak will transformconsumer behaviour going forward.
Logistics
We now turn our attention to the logistics
sector. The table compares Mitsui FudosanLogistics Park (MPL), a good indicator of theGrade A logistics sector and CRE Logistics
Fund (CRE), which represents mid-scale
logistics facilities. At the index peak, thespread between the former and the latter
was 150 bps. This expanded by 150bps overthe ensuing month, before tightening to 190
bps, where it has remained since. With robust
demand for logistics assets, the impact fromCOVID-19 certainly looks more manageable.
Given the lingering labour shortage, midscale facilities also have sound demand.
HotelHotels continue to bear the brunt of theCOVID-19 outbreak, and this can be seenin the table. The spread between Hoshino
Resorts REIT, who invests in unique hotels
with a strong brand appeal, and Invincible,
an investor in budget hotels, was 150 bps

J-REIT Volatility and Japan Property

at the broader market peak. Subsequently,
this increased by over 600bps by the timethe index had reached its lowest point. Thespread has now found firmer footing ataround 690 bps. The hotel sector has notbeen helped by the large supply of mostlyof budget hotels, and as a consequence, thishas significantly adjusted required dividend
yield, with concerns mounting for theseassets.

GRAPH 3: The Relationship Between US Treasuries and the TSE REIT Index Year-todate as of 15 April 2020

INDEX (6 JAN = 100)

TSE J-REIT Index (LHS)

US 2-YR Treasury Yield

US 10-YR Treasury Yield

110

2.1%

100

1.8%

90

1.5%

80

1.2%

70

0.9%

60

0.6%

500.3%

400.0%

IMPACT FROM ABROAD
Under normal circumstances, the reductionof global interest rates, especially in the US,
has been a tailwind for the J-REIT market.
The compression of government bond yields
that followed the Global Financial Crisis
further enhanced the attraction of the wider
yield spreads found amongst J-REITs and, indoing so, had recently pushed unit prices tohistoric highs.

Source US Department of the Treasury, JPX, Savills Research and Consultancy

GRAPH 4: COVID-19 Timeline of Events in 2020 as of 15 April 2020

TSE J-REIT Index

TOPIX Index

4 Feb
The Diamond
Princessquarantined in thePort of Yokohama

13 FebFirst deathfrom COVID-19in Japan

16 Mar
US Fed slashes interestrates to near 0%, whilst BOJ
expands monetary stilumousand asset purchasing program

25 & 26 Mar
Governor Yuriko Koike
strongely urges residents tostay at home to prvent an
explosive surge in infections

7 Apr
State ofEmergency
declared110

INDEX (100 = 1 JANUARY 2020)

100

90

80

70

60

50

15 JanFirst case of
COVID-19 inJapan

24 JanPrecautions
increased inJapan

9 Feb
Global death toll
surpasses theSARS epidemic of
2002/327 FebShinzo Aberequests closing ofschools from 2 Mar
to early Apr

11 Mar
The WHO declares
the coronavirus
outbreak as apandemic

23 MarTokyo governor YurikoKoike warned citizens that a
lockdown may be necessary
if infections surge in Tokyo

3 Apr
Japan bans entrance
to the country tovisitors from 73
countries and regions

Source Savills Research and Consultancy

5J-REIT Volatility and Japan Property

The current situation is far from normal,
however. In an attempt to cushion the blow
caused by the COVID-19 outbreak, the Fed
Funds Rate was initially cut by 50bps on 3March. As the global situation deteriorated, alarger-than-expected cut in rates on 15 Marchsaw US interest rates languish close to zero– a level not seen since 2015 – and the fallout
from these extensive measures has been clear
amongst both credit and capital markets. Forinstance, a major listed credit default swap
index in Japan has skyrocketed, implying
extreme uncertainty in the credit markets.
Meanwhile, acknowledging the severity of
the global pandemic, J-REIT unit prices
plummeted soon after the latest Fed rate cut,and despite some recovery since, unit prices
remain far below previous highs (Graph 4).
Looking further ahead, however, there may

be a sense that if market stabilisation can beachieved, the potential for significant upside
remains for J-REITs. That said, with the fullscale of the COVID-19 pandemic in Japan
still unclear, this optimism may be shortlived. Indeed, it would seem that the Japanesemarkets have priced in the severe outbreakin the West, but is yet to price in a full-blown
epidemic in Japan. As such, if the domestic
situation were to significantly worsen, theJ-REIT market could very well take anotherdive. Alternatively, global capital makets may
have become accustomed to the grim news
related to COVID-19, including the significant
deteroration of major ecomonic indicators,keeping the market strangely calm during thepandemic.

For more information about this report, please contact us
Savills Japan

Savills Research

Christian Mancini
CEO, Asia Pacific(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Director, Head of Research& Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Senior Director
Asia Pacific+852 2842 4573
ssmith@savills.com.hk

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